THINGS TO KNOW BEFORE INVESTING IN SHORT TERM INCOME FUNDS
This Is What You Need to Know Before Investing in Short Term Income Funds
Are you looking to invest in a fund that gives reasonable returns and high liquidity to achieve your short to medium-term financial goals? Short Term Income Funds may be best suited for you if you are looking to explore debt mutual funds within a moderate market risk.
What Are Short-Term Income Funds
These funds are open-ended debt mutual fund schemes which invest in debt and money market securities with a portfolio duration* of 1 to 3 years.They invest in debt securities such as corporate bonds, government securities, securitized debt, state development loans etc. These funds also invest in money market securities such as treasury bills, certificates of deposits, and commercial papers to ensure liquidity.
* The schemes’ portfolio duration is determined by Macaulay duration. The Macaulay duration calculates the weighted average time to receive the cash flows from a bond. It is the average of the duration of bonds within the portfolio, accounting for what percentage of the total portfolio each bond represents.
Why Duration Matters
Duration is important to investors because it acts as a guide for how sensitive a debt fund is to changes in interest rates. For most investors, the bond duration indicates how much the market price of a bond will change when its yield (i.e. its current rate of interest) changes. It is important to remember that yields and prices move in opposite directions, so as yields fall bond prices increase, thereby positively impacting funds returns and vice versa.
A broad thumb rule suggests when yields fall (or rise), a bond’s price will rise (or fall) by an amount which is approximately equal to the change in the yield, multiplied by the duration of the bond. So say, if the yield on a bond with a duration of five years falls (or rises) by 100 basis points (one per cent) the price of the bond may be expected to rise (or fall) by 5%, thereby positively (or negatively) impacting the fund performance.
So, the greater the duration, the higher the fund’s interest-rate risk and volatility in the fund's value. The fund manager builds a portfolio that is well suited to the prevailing market conditions
What Are the Advantages of Investing in Short-Term Income Funds
How Taxation Impacts Short-Term Income Funds
The capital gains taxation is dependent on how long you have held the units of the Short-Term Income Fund before selling or redeeming them.
*As per the present tax laws, eligible investors (Individual/HUF) are entitled to deduction from their gross total income, of the amount invested in equity linked saving scheme (ELSS) upto Rs. 1,50,000/- (along with other prescribed investments) under Section 80C of the Income Tax Act, 1961. Subject to prevailing tax laws.
Who should invest in Short-Term Income Funds
It is the right choice for investors who -